Debit Card Overdraft Abuse Continues

Some major players opt-out of high-cost “protection” racket but many banks still benefit from excessive fees and account manipulation

Center for Responsible LendingMarch 15, 2011

Some of the biggest banks in the nation still collect
excessive fees from American families by encouraging overdrafts and
manipulating their customers’ accounts.
Recent comments in the media suggesting that Americans overwhelmingly
choose this costly product are suspect, in part because they overlook millions
of customers at banks that do not offer the costly option for debit card
transactions. These reports also ignore the impact of heavy-handed and
deceptive marketing by banks who have sold costly overdraft “protection” as a
beneficial program.

Bank of America and Citibank, the #1 and #4 banks in the
nation in terms of deposits, do not charge fees for uncovered debit card
transactions. Instead, these banks
decline them at no cost to customers or link customer checking accounts to a
savings account or overdraft line of credit. There is no evidence that
customers are leaving these banks—who currently comprise 20 percent of the
market—in search of those that will automatically approve uncovered
small-dollar debit card transactions for an average $34 fee.

When Bank of America announced
its decision to discontinue high-cost overdraft “protection” on debit card
transactions last year, a bank representative said, “What our customers kept telling
me is ‘just don’t let me spend money that I don’t have’...We wanted to help
them avoid those unexpected overdraft fees.”

A Consumer
Reports survey from last fall reported that only 22 percent of bank
customers had opted in to “overdraft protection.” Targeted, misleading
marketing of customers with the potential for frequent overdrafts likely
accounts for the higher opt-in rates reported by some specific banks. Tellingly, many of these marketing campaigns
did not inform customers that lower-cost options existed—including having debit
card transactions simply declined for no fee.

CRL research has repeatedly found that Americans prefer to
have debit card transactions declined at no cost rather than to pay a $34 fee
for them to go through. This finding is supported by consumer complaints to
regulators and their lawsuits against some major banks for reordering debit
card transactions from high-to-low in daily balancing in order to boost
overdrafts. Despite these numerous
complaints and lawsuits, some industry “experts” insist that consumers want
banks to re-order transactions, even though this results in extra overdraft
fees. But a survey by Consumer Federation of America last year found that
customers overwhelmingly reject high-to-low reordering, and the FDIC recently
instructed its banks to stop posting payments in an order that increases fees.

Opting in to overdraft “protection” without being told the
cost of all options, or the risks, hardly constitutes an informed choice. More
action is needed to provide Americans protection from overdraft abuse.

Related resources

A CRL
video helps explain how banks are playing with the numbers and gouging
customers through this practice.

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org; or Charlene Crowell at (919) 313-8523 or charlene.crowell@responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.